How long would it take the Department of Labor (DOL) to change a light bulb? Several years, judging by progress on the even simpler task of mandating standardized lifetime retirement income disclosure for Defined Contribution (DC) pension arrangements1.
The required steps have been taken
The question of whether DC statements ought to show not only account balances but also an estimate of how much retirement income that balance would provide rose quickly up the legislative agenda in 2008/2009. Consultation on the subject took place in 2010. An advance notice of proposed rulemaking was issued three years later. And three years after that, it looks like it may yet need a kick via primary legislation for a rule to be finalized.
At the 2010 hearings, my own input (on behalf of Russell investments) was simple: “supplement the reporting of the account balance with a second number: the account balance divided by an annuity factor.” This is hardly an onerous requirement. Indeed, one objection to the move is that merely adding another number to account statements won’t make much difference. I do not agree with that objection; what gets measured gets managed. The proposed approach is simple, meaningful and objective.
And the real reason for doing it is that, if there is to be any real progress toward aligning the DC system toward the goal of providing retirement income, then reporting has to reflect that goal. It’s a basic element in the evolution of 401(k) plans to be built around the provision of income throughout retirement, rather than simply the accumulation of assets.
Most likely, the lack of action on this front is at least partly due to the DOL’s focus in the past few years on the much-discussed Conflict of Interest Rule that extends the application of the fiduciary standard.
With that rule now on the books, attention can turn back to other matters. Retirement income disclosure seems to be low–hanging fruit. And a prompt to action appeared in bipartisan draft legislation that was unanimously approved recently by the influential Senate Finance Committee. The bill would require disclosure along the lines I’ve described. (Another topic that this blog has been following—open MEPs—also found its way into that bill, along with various other odds and ends including a safe harbor for DC plans that offer an annuity option.)
A few other observations in closing:
- The calculation should be standardized. This is essential. If results depend on who prepares the statement, they are less meaningful, and more onerous to produce—perhaps even raising concerns over potential liability.
- An objection that is sometimes made is that the income disclosure figures will vary over time. That’s true, but participants are already accustomed to seeing their account values vary and that information is nonetheless universally accepted as an objective and fair assessment of the situation at that point in time. It’s the same with income disclosures.
- The DOL’s 2013 draft proposed rule included not only a lifetime income equivalent of the current account balance but also (a) the projected account balance at retirement and (b) the equivalent lifetime income that this projected account balance would support. That’s a much more subjective calculation, requiring many more assumptions than needed for the basic reporting (and, correspondingly, an even stronger case for standardization). The Senate Finance Committee proposal makes no mention that I can find of requiring projections. Certainly, these numbers should be seen as supplements to the core reporting based on the accrued account balance.
- There seems to be an assumption that income is best disclosed as a monthly amount, rather than annual. But am I really alone in thinking that most people tend to think in terms of annual income? And an annual figure may reduce the disillusionment that most will feel on being told, for example, that $100,000 might buy you $500 a month at today’s low interest rates.
Disclosure alone will not turn an imperfect system into a perfect system. But disclosure is an essential component . It is a necessary step toward other goals such as better savings rates and more customized advice on things like asset allocation and retirement planning, opening the door to better take–up (where appropriate) of annuities and other retirement income products. It’s time to get on with it.
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¹Although weak in English, I hold out hope that this joke may be at least mildly amusing in another language, Hungarian perhaps, or Xhosa. It seems unlikely.